Bank of America Analyzes High-Quality Stocks

Investing.com — Bank of America (BofA) stated in a note on Friday that today’s high-quality stocks differ significantly from those during the 2008 financial crisis.

As market volatility rises, investors are increasingly attracted to high-quality stocks. However, the dynamics of these assets have shifted from what they were in the past.

BofA points out that high-quality stocks—those rated “B+ or better” by S&P—are no longer trading at deep discounts seen since the Tech Bubble. Instead, they have re-rated to a slight premium, which BofA claims is not an indication of overvaluation.

The last two decades were anomalous, in our view: hyper-accommodative policy and ultra-low rates back-stopped risk-taking.

BofA strategists indicate, “Finance 101 says predictability should trade at a premium to risk. Today’s quality premium is in line with its average premium before 2000, marking simply a return to normalcy.”

“Today’s quality is not 2008’s quality,” the bank added.

BofA observes that cyclical sectors are often seen as lower quality, leading investors towards defensive, secular growth areas. Despite cyclical sectors typically showcasing higher betas, reflecting perceived risk, actual earnings volatility tells a different story.

“Today some larger cyclical sectors have higher quality characteristics than defensives/secular growers,” BofA points out.

For instance, financials now possess the highest proportion of high-quality companies, and the Real Estate sector has experienced a significant quality shift, with 70% of its market cap now classified as high-quality.

BofA also notes that the S&P 500’s dividend payout ratio is near record lows, suggesting safer and more sustainable dividends in comparison to 2008. This implies dividends could play a more substantial role in total returns in the coming years, particularly as long-term price gains may be constrained.

Additionally, the equal-weighted SPW has demonstrated more stable earnings than the cap-weighted S&P 500, strategists added.